UBS Loses Bid to Block Fannie, Freddie Suits

By

Nick Timiraos

May 4, 2012 10:26 p.m. ET

A federal judge Friday denied UBS AG's effort to dismiss a lawsuit by the federal regulator for Fannie Mae and Freddie Mac alleging the Swiss bank deceived the mortgage giants into buying billions of dollars of shaky loans during the housing boom.

The Federal Housing Finance Agency filed suits against UBS and 17 other banks last summer alleging that they violated federal securities law in selling nearly $200 billion of mortgage-backed securities. The suits represent one of the most sweeping actions by a federal regulator stemming from the mortgage crisis.

Friday's ruling by U.S. District Judge Denise Cote of Manhattan is the first on any of the defendants' motions to dismiss the FHFA suits. The court is handling pretrial proceedings for 15 of the lawsuits filed by the FHFA.

In the UBS case, the FHFA argued that Fannie and Freddie sustained losses of more than $1.1 billion on some $6.4 billion in mortgage-backed securities that the firms bought as investments between 2005 and 2007.

The judge refused to dismiss claims under a 1933 federal securities law and ruled that the FHFA had standing to bring the lawsuit, rebuffing UBS's challenge of the statute of limitations against such claims. It did grant UBS's motion to dismiss a claim of negligent misrepresentation.

Samples of loan files conducted by the FHFA "are sufficiently suggestive of widespread inaccuracies" in property valuations and other underwriting features to suggest that disclosures made to mortgage investors about the quality of those loans were "objectively false," wrote Judge Cote in rejecting several of UBS's motions to dismiss the lawsuit.

Fannie and Freddie were "sophisticated participants" in the mortgage market and their losses "are attributable to the deepest recession in 75 years," said a UBS spokesman in a statement. The company "remains confident in its defenses to the claims in the complaint."

An FHFA spokeswoman said the agency was "pleased with the court's ruling in this matter and will continue to pursue its claims against the parties, which is important to the [companies] and to taxpayers."

Fannie and Freddie were taken over by the U.S. government 3½ years ago and the FHFA was named as the conservator for the failed mortgage titans. Taxpayers are on the hook for nearly $150 billion that is been used to fund continued operations.

The mortgage companies typically buy loans from originators and package them into securities that they then sell to investors. But during the past decade, Fannie and Freddie increasingly bought top-rated pieces of higher-yielding securities that they didn't package and that instead were issued by their Wall Street competitors.

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